Question

The Stewart Company has $1,266,500 in current assets and $531,930 in current liabilities. Its initial inventory level is $303,960, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0? Round your answer to the nearest cent.

Answer 1

Step-by-step explanation:

Formula

Current Ratio = Current Asset / Current Liabilities

To know how much to expand short-term debt and inventories in the formula of the current ratio, to the amount of current assets and current liabilities must add an amount such that the result is 2.0.

(1,266,500 + x) / (531,930 + x) = 2.0

(1,266,500 + x) = 2.0 * (531,930 + x)

1,266,500 + x = (2.0 * 531,930) + (2.0 x)

1,266,500 + x = 1,063,860 + 2.0 x

1,266,500 - 1,063,860 = 2.0 x – x

202,640 = x

So the maximum that should be expand inventory and short-term debt is $202,640